Tax Deductions for Student Loan Interest
Federal Tax Break for Interest Paid on a Qualified Student Loan
The Student Loan Interest Deduction is an education tax benefit that allows taxpayers to deduct up to $2,500 of the interest paid on student loans. This education tax deduction can be claimed on your federal income tax return to reduce your taxable income.
Deductions lower your taxable income and they are worth the percentage equal to your marginal tax bracket. For instance, if you are in the 24% tax bracket, a $1,000 deduction saves you $240 in tax (0.24 x $1,000 = $240). On the other hand, credits lower your taxes. Tax credits provide a dollar-for-dollar reduction of your income tax liability. For instance, a $1,000 tax credit actually saves you $1,000 in taxes. A tax credit is always worth more than a dollar-equivalent tax deduction, because deductions are calculated using percentages. Referring to the numbers above, you can see that a $1,000 credit offers a savings of $760 more than a $1,000 deduction.
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Student loan interest is the interest that you paid during the year on a qualified education loan. You can deduct all the interest you paid on your student loan during the year, which includes voluntary interest payments.
You may claim the student loan interest deduction if you meet all of the following requirements:
- You paid interest on a qualified student loan during the year
- You’re legally obligated to pay interest on a qualified student loan
- Your filing status isn’t married filing separately
- Your MAGI (modified adjusted gross income) is less than a specified amount which is set annually
- Neither you nor your spouse, if filing jointly, can be claimed as dependents on someone else’s return
A qualified student loan is a loan you took out solely to pay qualified higher education expenses that were (all of the following):
- For you, your spouse, or a person who was your dependent when you took out the loan
- For education provided during an academic period for an eligible student
- Paid or incurred within a reasonable period of time before or after you took out the loan
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The amount of your education tax deduction is based on your income level. The maximum amount you can claim for the student loan interest deduction per year is $2,500. The size of your tax deduction is reduced if your modified adjusted gross income (MAGI) is above the annual threshold. For tax years 2021 and 2022, the MAGI threshold is $70,000 for single filers (or $140,000 for married couples filing jointly).
The following items cannot be claimed for a student loan interest tax deduction:
- Interest that you paid on a loan if you were not legally obligated to make interest payments under the loan terms
- Fees for lender services, such as loan origination fees and processing costs
- Interest payments that you made through a loan repayment assistance program (such as the National Health Service Corps Loan Repayment Program, NHSC)
To claim the student loan interest deduction, you must include it as an adjustment to your income. Note that you do not have to itemize your deductions for this education tax benefit. The tax deduction can be claimed on your federal income tax return (Form 1040 or Form 1040-SR).
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